Life Insurance
Life insurance is a financial product that provides a safety net for your loved ones in the event of your death. When you purchase a life insurance policy, you pay scheduled premiums to an insurance company. In return, the company promises to pay a set amount of money, called the death benefit, to your beneficiaries if and/or when you pass away, provided your insurance policy is in good standing upon your death.
The main purpose of life insurance is to ensure that your family or dependents are financially supported after you’re gone, though there are some circumstances in which life insurance can make sense for other reasons. This money can be used to cover various expenses, such as funeral costs, outstanding debts, or even day-to-day living expenses.
There are different types of life insurance, but the most common are term life and permanent life insurance. Term life insurance provides coverage for a specific period, like 10, 20, or 30 years. If you pass away during that term, your beneficiaries receive the death benefit. Permanent life insurance (sometimes known as cash-value life insurance), on the other hand, covers you for your entire life and can also includes a savings component that can grow over time. There are many different sub-types and the topic of life insurance can get very complex very fast. For the purposes of the Next Best Step system the guidance is to avoid permanent policies and use term life insurance.
Life insurance is especially important for those who have people depending on their income, such as children or a spouse. It offers peace of mind, knowing that your loved ones will have financial support even if you’re no longer there to provide for them.
Life insurance is encouraged at Next Best Step:
How to Purchase Life Insurance
Life insurance is an insurance product, not an investment. Because of this, life insurance is always sold by an insurance company.
You may, depending on your situation (see Next Best Step 7 for specific guidance on the amount), need or want to purchase life insurance outside of your employer-based policy, if applicable. To do so you would contact an insurance agent or an insurance company.
WARNING! Many insurance agents are paid on a commission basis. This doesn’t make them bad people, but it does commonly mean that they will make more money if you purchase more expensive products. Keep this in mind as you’re making your decision on the type and amount of life insurance to buy. It is in the insurance agent’s best interest for you to buy more expensive policies.
Life Insurance Example
Who doesn’t need life insurance?
At some point you likely will no longer have an insurable need:
Many Retirees: This isn’t applicable for all, but most retirees do not have a need for life insurance. You’ve already saved up enough assets to provide an income. Even if you’re married, those assets don’t go away upon your death. Exceptions to this would be retirees who are still partially working, those with a pension that doesn’t fully carry over to a spouse, and/or retirees who want to provide a large lump-sum to help pay for LTC of a surviving spouse.
Single Individuals: If no one is financially dependent on you, then why do you have life insurance? About the only reason one would choose to do so is because you hope or plan to get married and/or have children in the near future, and you’d like to get insurance in advance of that.
Why would someone choose to purchase life insurance?
Purchasing life insurance is a borderline must if you are:
A Parent/Caregiver: Is someone financially dependent upon you? Does your income provide for some or all of a person’s (or multiple people) daily expenses? If yes, then life insurance is absolutely something you should have.
Married and Still Working: If you are married, even if your spouse is gainfully employed, some base level of life insurance is a good idea. In the event of your death, your spouse is going through a lot, both emotionally and financially. There are expenses such as a funeral and burial, but there’s also a lifestyle that must be adjusted to.
Meet Tyler. He’s 47, married, and has 3 dependent children and the household expenses are $7,000 per month. As he’s the sole breadwinner of the family, he has purchased $840,000 ($7k X 12 months X 10 years) of life insurance. He purchased a 20 year term life insurance policy 7 years ago when his youngest was 8, so that he could be sure to get her through college.
Tyler’s 20 year term life insurance policy has an annual premium of $800, which he has always paid on time.
Unfortunately Tyler passes away. The life insurance company pays out the $840,000 to Tyler’s wife, as Tyler had named her as the primary beneficiary. This payout occurred as soon as Tyler’s wife provided the death certificate and proof of identification of herself.
FAQs
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Coverage of at least 50% of your income
A minimum of 5 years of payout, but ideally targeting a to-65 policy
Cost-of-living-adjustment rider (COLA)
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If you get to NBS 9, you should not have a need of short term disability insurance. You should have sufficient cash in an emergency savings account while also having limited debt and the ability to manage expenses through your budget.
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Talk to a Financial Planner. If you already have one, you may be better off keeping it but you may be best off to cut your losses and cancel the policy. Do not ask your insurance agent for advice; he/she gets paid on commission and is incentivized to tell you that you need insurance even if you don’t.
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Many employers provide life insurance. It is the official position of The Good Plan that you employer-provided life insurance should be supplemental and that a personally owned policy should be purchased. This is because many employer-based policies are annually renewing term policies, meaning they get more expensive over time. Additionally, you could lose your job at any time and thus your insurance. It would be unfortunate to be in the position where you need life insurance but are uninsurable.